Christie wants to cut taxes while the cashbox is empty

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New Jersey Governor Chris Christie got a lot of media attention this week when he announced that Warren Buffett “should just write [the government] a check and shut up,” on CNN’s Piers Morgan Tonight. His great one-liner obscured the more profound question he was being asked, which was: Shouldn’t the wealthy pay a higher proportion of taxes? Beliefs about progressive taxation vary widely, but income taxes at every level of government are structured so that the wealthy pay a higher proportion of taxes.

If I had been asking the governor questions, I would have focused on his fetish for cutting income taxes when his state’s cashbox is nearly empty. Or as the rating agency Standard & Poor’s defined the problem:

New Jersey Gov. Chris Christie released his proposed $32.15 billion budget for fiscal 2013 on Feb. 21. The budget remains structurally unbalanced, is built on what Standard & Poor’s Ratings Services regards as optimistic economic projections to close the budget gap, and increases New Jersey’s (AA-/Stable) reliance on nonrecurring revenues.

[...]

Assuming no further reductions to fund balance are needed to cover revenue shortfalls in fiscal 2012, reserves would fall to $300 million or less than 1% of expenditures at fiscal year-end 2013 if the legislature adopts the proposed budget. At this level, New Jersey’s fund balance would provide a limited financial cushion with which to offset revenue shortfalls should current revenue growth assumptions turn out to be optimistic.

I’ll translate the rating agency jargon: The state revenue projections are fantasy. If New Jersey gets lucky and revenues don’t fall short again as they did this year, then the state will end up with a cushion of $300 million to buffer a $32 billion budget. But if economic conditions slow at all (remember, many New Jerseyans work on Wall Street), then take out the midyear budget ax and start chopping. Basically the state is and will be running on fumes.

But Christie’s attack on Buffett obscures all that and shows him as forceful and in charge. In contrast Standard & Poor’s paints Christie as a fiscal illusionist. I just see him as another politician who promises the moon and prays he can juggle the books to cover his promises — or that he can get out of office before payment comes due.

If you’re looking for true fiscal conservatism, you’d do well to study Utah. Although Utah is rated AAA, the state is trying to figure out how to lower its municipal bond indebtedness in case of any emergency that might require it to issue bonds. The state also continues to top off its rainy-day fund, which is about 4.6 percent of general operating revenue. From Utah Policy:

Utah has been recognized nationally as a model of fiscal conservatism. And so it’s more than a bit ironic that the state now stands at 91 percent of its constitutional debt limit. In short, conservative GOP lawmakers have gone on a borrowing spree in recent years, mainly to rebuild I-15 in Utah County.

With that high borrowing level, if there were a natural disaster, like a major earthquake, Utah may be hard pressed to pay for much-needed infrastructure repairs. There are now at least two ideas on how to “pay down” some of that debt.

The U.S economy is not yet out of the woods, and every state and municipality needs to be prepared for potential hard times ahead. Cutting taxes when the cashbox is empty puts states on the road to fiscal ruin. Building up rainy-day funds and paying down debt creates fiscal space and some cushion for the rough patches. We enjoy an advantage: having reasonably up-to-date information about government finances. Let’s rely on that rather than politicians’ promises.

Author Profile

I’m Cate Long and I write about the retail fixed income markets including municipal bonds. My primary interest is creating tools and systems to help retail investors understand bond markets. I’ve worked for a number of years with industry standards organizations, regulators and Congress to help craft a more transparent and fair framework for investors to participate in the fixed income markets. I'm a guest contributor to Reuters.com. Any opinions expressed are mine alone.